Money Insights

January 2012

Q: I am turning 60 next year. Should I apply for CPP now or wait until I am 65?

A: It sounds like you realize that electing to receive CPP prior to age 65 means that your monthly pension will be less than if you waited until age 65 to apply.

There is no simple answer to this question, which explains why you may have received conflicting advice.

Here is what you need to know to make a decision that is right for you.
The most recent changes to the CPP were designed so that if you live an average lifespan, there is no advantage or disadvantage to taking benefits early. There are some situations where taking CPP early or later make really good sense. Perhaps you fall into one of these categories:

Early CPP situation #1

You need the money – If have a cash flow deficit that early CPP benefits will cover, it makes sense to take it rather than build debt.

Early CPP situation #2

You are in poor health – If you expect a shortened life expectancy either because you have health issues or because your family history is one of shorter life spans, taking early CPP is a good bet.

Early CPP situation #3

You spent a number of years out of the workforce - Your pension amount depends on averaging your contributions and “pensionable earnings” from age 18 until you start taking CPP. You’re allowed to drop 15% of your lowest-earning years from the calculation, which amounts to seven years if you retire at 65. If you took time off work to raise kids or because you had a serious disability, you get to drop even more of your low-earning years. The thing is, it’s easy to use up all your drop-out years if you spent a long time getting an education or just “finding yourself.” If you then stop working in your early 60s and don’t take CPP right away, you’ll immediately start adding more years of zero earnings to the calculation. This will lower your average pensionable earnings, which in turn will make your benefit go down. Under these circumstances, you’re clearly better off starting CPP early.

Later CPP situation #1

You expect to live a very long time – If longevity is in your family history, delaying CPP until at least age 65 means that you will have a larger pension for a long period of time.

Later CPP situation #2

You are still working – You can now begin receiving CPP benefits, and grow the benefit through continued contributions while you are working. That being said, you will possibly pay a higher rate of tax on CPP income while you are working than if you delayed receiving benefits until you retire.

As you can see, there is no simple answer to this question. Hopefully this outline will help you determine which approach is right for you.